Kiri Industries Limited (532967) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '23 Earnings Conference Call of Kiri Industries Limited. [Operator Instructions] Please note that this conference is being recorded. I would like to hand over the call to Ms. Purvangi Jain from Valorem Advisors. Thank you, and over to you, ma'am.

Good afternoon, everyone, and a warm welcome to you all. My name is Purvangi Jain from Valorem Advisors. We represent the Investor Relations of Kiri Industries Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings conference call for the fourth quarter and financial year ended 2023. Before we begin, I would like to mention a short cautionary statement. Some of the statements made in today's call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on the management's belief as well as assumptions made by and information currently available to the management. Audiences are cautioned not to place undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. I would now like to introduce you to the management participating with us in the earnings conference call. We have with us Mr. Manish Kiri, Managing Director; Mr. Jayesh Hirani, Senior Manager of Accounts and Finance; and Mr. Suresh Gondalia, Company Secretary. I now request Mr. Manish Kiri to give his opening remarks. Thank you, and over to you, sir.

Good afternoon, everybody, and welcome to the earnings conference call. Let me first bring you on the financial performance of the fourth quarter and then the financial year ending 2023, followed by the operational highlights. On a stand-alone basis, during quarter 4 FY '23, the company achieved revenue from operations of INR 157 crores, which was lower by 52% year-on-year basis, higher by 18% quarter and incurred an operating loss of INR 15 crores. Net loss for the quarter was 27%. At financial year end in 2023, the revenue from operations to that [ INR 602 ] crores, which is reduced by 47% as compared to financial year 2022 and an operating loss of INR 109 crores against profit of INR 31 crores in FY 2022. Net loss for the entire year was about INR 134 crores as compared to the net loss of INR 9 crores in FY 2022. On a consolidated basis, quarter 4 FY '23 revenue from operations stood at INR 222 crores, a decline of 47% year-on-year basis and increased by 9% quarter-on-quarter basis. During the current quarter, an operating loss of INR 5 crores and net loss of INR 18 crores. For the financial year ending 2023, revenue from operations stood at INR 945 crores, a decline of 37% as compared to FY 2022. During FY 2023, operating loss of INR 37 crore as against operating profit of INR 121 crores in FY 2022. Net loss before share of profit of associates stood at INR 105 crores as against net profit of INR 53 crores in financial year 2022. Revenue and EBITDA launched in quarter 4 FY '23 included amount of INR 61.98 crores and INR 10.59 crores, respectively. Margins were impacted mainly due to the increase in raw material prices, power and fuel cost, freight and transportation costs during the current financial year as compared [ to preceding ] financial year. Prices of vinyl sulfone reduced by at least 9% as compared to FY 2022 in 2023. FY 2023, operational expenses include majority of legal expenses, which should substantially reduce in the coming years FY 2024. We expect to reclaim EBITDA margins obtained in previous years by increasing production capacity through optimizing product mix, controlling operational and fixed costs. There is reduction in fixed costs, which is happening in this year and expanding into untapped markets to boost the top line. We have gradually passed on increases in raw material pricing to its end customers, but there is still space to expand material margins, which will be achieved as demand for dyes and dyes intermediates rises. We have passed through the time where the demands for dyes and dyes intermediates were one of the lowest in many years. We anticipate a modest increase in demand over the next 3 to 4 quarters. In the matter of DyStar where the company holds 37.57% equity stake, the company has been very successful and has won against Senda, a wholly owned subsidiary of Longsheng Group, wherein on March 3, 2023, Singapore International Commercial Court crystallized and decided the final valuation of company's stake at USD 603.8 million, which has increased by [ $122. 20 ] million, which is 25% higher than the earlier determined valuation of USD 481.6 million, giving an effect of the decision of the court of appeal, which is Supreme Court of Singapore. The company is taking currently all necessary steps for execution of buyout of its 37.57% stake by Senda, which has been crystallized after a long drawn legal battle with Senda at SICC as well as at Supreme Court of Singapore. Senda has failed to make payment of legal cost amount awarded to the company and failed to comply within deadlines given till 20 January 2023. The company has filed Writ of Seizure and Sale of Senda's shares held in DyStar to the extent of recovery of legal costs awarded to Kiri by SICC as well as appealed by Supreme Court of Singapore on 20 January, 2023. Recently, the sheriff office of Singapore Supreme Court took possession of Senda's shares held in DyStar to the extent of legal cost amount and has already started a process to sell the [ held ] shares to recover legal costs for Kiri. In the coming quarters, the moderation of input costs, reduction in the operational and fixed costs, expected higher capacity utilization and easing of inflation could enable the company to deliver volume lead profitable growth in the coming quarters. With that, I would now like to open the floor for any questions.

[Operator Instructions] The first question is from the line of [ B. Suresh ] from [ Birhams ] Financials.

Sir, actually Kiri case is final valuation will come. Enforcement development process have taken Senda's shares, that amount INR 50 crores received, sir?

Yes, the shares which were attached and which are in the process of sale right now, where the Supreme Court has directed sheriffs to do the process is to the extent of legal costs, and that was around [ SGD 8.1 ] million plus interest. So that is the enforcement action on the legal costs. As far as the valuation award is concerned, as you are aware, the final decree given on March 3, and for the last 6 months, we have been trying and we have been following up, our lawyers have been in touch with the councils of Senda to execute the buyout. But unfortunately, till date, Senda has not executed the buyout. Senda has not complied with the Supreme Court order. And very soon, Kiri would have no choice but to also file enforcement papers for the valuation award.

Our valuation award also is coming shortly, sir?

The enforcement will need to start shortly because Senda has failed, not honored the court order.

Enforcement action is all -- total amount also enforcement action started shortly.

Right. And as soon as that starts, as soon as the documents filed in the court, we'll announce to the stock exchange and you all will know.

Sir, you can give the regular updates and the clarity of full investors, sir. So many -- you are also waiting for -- eagerly waiting. I am -- investors are also waiting. You can understand investors' problems. So many years, so many essentials you have, you can understand, you can give the clarity of -- actually so many rumors in the Kiri coming. It is not a clear issue. It is playing something, so many bad rumors will coming in the market. You can give the clarity of investors and regularly you can update the exchanges. And you can conduct the conference to investors. So can -- how much time to take, sir, this amount you can receive, at least...

Well, see the -- to address your first question, we always immediately update the investors, and we make necessary disclosure as soon as the development happens in the court, correct? For any significant material development happens in Singapore, we have been in past, and we will definitely update, right? Meanwhile, company has been doing its job. We have been constantly in touch with our councils in Singapore. And please be rest assured that whatever actions to be taken for the recovery and for the enforcement of buyout, we are on the top of it. That's the highest priority the management is working on. We can update you, like you know, as soon as some result comes, as soon as something which is significant, or which is material for all to know. If we keep updating stock exchange and you saying that we are making efforts, we are making efforts. It's granted. It's known fact that we are making efforts. But when something comes up, which is the development for all of you to know, we'll surely make that announcement and update everyone. As far as the rumors are concerned, the rumors are meaningless, right? The reality and the facts would be updated to all of you, be rest assured. And you will know whenever any significant development happens there.

Sir, then any significant development in any short time?

Yes. The next step which you will know is filing the enforcement applications to the court. And there will be multiple things we'll be filing. And as soon as it is done, you will note that we are back to the court now and then it is in the hands of court to take it forward for the recovery and for the enforcement. Yes, but you will know very soon.

So you can now -- very soon, sir?

Yes.

Sir, actually, Kiri, DyStar results will -- all this quarter is loss. Actually, DyStar results, regular results and dividend amount, it can receive, sir?

There is no dividend received from day 1 until now , right? And DyStar has never paid any dividends. That was also one of the main oppressive acts that got recognized, right? So there is no dividend which has taken place. As far as DyStar's performance is concerned, every quarter, we disclosed that cost performance and DyStar performance even in the year 2022 was a good performance. DyStar ended up with almost $164 million or $166 million of EBITDA, which is a good number. So yes, we continue to consolidate DyStar until the buyout is executed, and we will continue to keep reporting the numbers.

Sir, you can handle this out of court, any chances is there, sir? Out of court, any chances is there in Senda's issue?

No, no, nothing out of court. We -- almost now, we have entered into a ninth year of battle. And there is nothing outside court. There is no settlement outside court. Whatever happens will happen through court only.

You can -- enforcement development is coming short, very soon, you can expect that, sir?

Yes, yes, you will hear very soon from us, absolutely.

Very soon? Sir, best of luck, but you can understand investors feeling also, sir, so many years from waiting, some?

Yes, yes, fully understand and be rest assured. We give you confidence that this is the highest priority to recover this money for the company, and we are on the top of it. Every action which is required to be taken, we are diligently taking those actions.

Sir, any of -- you have taken more actions. But any chances -- failure chances is there -- these actions?

Sorry, I didn't understand your question.

Actually, in that case, we have failed, any chances of this case is not winning? Not winning chances is there? Yes or no?

No, no. We have already won that is not about not winning, right? We have already won all the way till today, correct? We have got a final decree also with us, which is the final judgment appealed by Supreme Court. And now it's only the final phase of recovering these funds, recovering money. And that's what we are supposed to do now.

Thank you. Mr. Suresh, may we request that you return to the question queue for follow-up questions. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to 2 per participant. Should you have a follow-up question, we would request you to rejoin the question queue. The next question is from the line of Darshil Pandya from Finterest Capital.

So I just wanted to understand if you can give us an update on what is happening in the dye and pigment industry as a whole, like I just want to have a thing as what is going on in the industry.

Sure, sure. You see the industry as a whole has been going through one of the challenging and the toughest period over many years. And there are several factors which have affected the downturn of this industry. Today, the demand levels are way down, almost 50% demand in dyes as far as the export is concerned, that we have observed during the past 1 year. If you look at the India's exports of dyes, which used to be around 16,000 to 18,000 tonnes of reactive dyes every month, which has come down to almost 10,000 tonnes, so at 50%. And so that is one, the biggest concern is much lower demand and an almost half demand, which is then combined with the increases that we all have observed throughout last financial year, increase in energy costs, increase in fuel cost, right? That is compounding the complication. So that creates a huge margin pressure. We all are going through a huge margin pressure. And that's the reason that we have not been able to pass on enough of the cost increases to the customers. And that's why the impact is there on the margins. On the other side, if you look at the Chinese situation, they are also experiencing much, much lower demand. Demand is very lower in China. And that's the reason that the Chinese prices of intermediate, Chinese prices of dyes are also sustaining at a very low level. Again, that creates indirect pressure on Indian export prices and also prices in Indian domestic market to be in line with the prices coming from China. So these are the factors which have negatively impacted the performance of this industry and which has impacted the margins and going through one of the worst down times currently.

How do you look at going forward now? As on date, when you're speaking today, how does it -- like what is -- how does the future look like?

Right. There are 2 ways you can analyze the situation. When you look at the sales of the brands and retailers, there is -- for example, if you look at the performance of Inditex, which is a global textile player. Look at the performance of HUGO BOSS, look at other retailers' performance, there seems to be now improving -- increasing, reporting much higher numbers than we thought, correct? That's an encouraging sign that when the retailers and the brands and the sales numbers are picking up in the supply chain, our demand would also open up. That's one side of the positiveness, correct? The other side, if you look at the longest time in textile industry and dye industry, which is heavily linked with textile, the longest downtime in -- historically, in the past was around 18 months, right? We have already passed almost a year. So I would say by end of the year or towards the end of the year, we should have a rebound. We should have the demand opening up. We should have the supply chain quite empty. And we should be able to revise sales and demand towards the end of the year. That's what -- I mean, at end of the calendar year, which you are looking at around October to December quarter. So that's what we believe. That's our opinion. And let's see how the things turn out.

One last question, sir. So you also said the margins were impacted due to, I guess, raw material prices, power and fuel have gone up and freight and transportation cost has also gone up. So as far as my understanding, is there also transportation and freight costs have started coming down in the past too many quarters?

Yes, yes, yes. So the freight transportation cost has come down. Even the export freight, the sea freights have also come down -- significantly come down. And that's the positive side of it. In this quarter, from this financial year, which has started just now, some of the raw material prices have also started going down. For example, the prices of benzene has started going down. If you track the price of sulfur last quarter, around INR 18 to INR 20 is now around INR 13, also started going down. So certain raw materials have started going down. Freights have been down for more than 6 months now, international freights, sea freights. So those are the positive sides and that should help in improving the numbers, you are right. But please understand, in the case of Kiri, if you compare us with other peer group companies, the one significant difference is the ongoing recurring legal cost, right? And if you look at the prior numbers, this legal cost has been running for last 8 years and now ninth year, we have entered into somewhere in the range of INR 40 crores to INR 60 crores a year. So that's also a quite big number when the overall business is down. So that impact realized is higher if you compare with the prior years and this year. That's what differentiates Kiri's numbers with our peer group numbers.

Got it. And when do we expect to get done, the legal cost and all, sir?

I think it will continue till money comes, right? Because as you have just heard and I mentioned, we will be entering into enforcement stage. We have strengthened our legal team. We have added a few more lawyers because the final phase of battle. We have appointed a [indiscernible] council from U.K. now to help us. So legal costs will continue until we realize the buyout funds. We will have to go full on for the last phase now.

The next question is from the line of Sachin Gandhi, an individual investor. Mr. Gandhi, we would request you to speak a little bit louder.

I have a few questions. I've invested from long time in Kiri, and there have been no such fluctuations, which has happened in the last 6 months, like it fell down to 50%, right, from INR 600 to almost INR 250 or something. So what is the promoter's share in this? Or are they trying to increase their stake? Or what kind of [indiscernible] is there from the promoter's side? Because as of now, I've heard, I think 2 or 3 analysts calls back that promoters are trying to increase their stake. So are they really increasing their stake or they are just thinking about increasing their stake in the company?

Promoters will definitely increase their stake in the company. And that I have already mentioned in the last 2 calls, last 2 quarterly calls, and I'm saying today also, but that is irrespective of what could be the share price, correct? We saw this [ trend ] about 6 months ago and which is [ this trend ] now, correct? As far as the movement of share price is concerned, that's market driven. But if you analyze there were a few FIIs who exited somewhere around end of January. And that could be the reason by just looking at the situation and looking at the overall shareholding pattern. But beyond that, the promoters have nothing to do with the share price level. We will increase the share as a stake in the company, and that's what you will see.

Okay. And secondly, I wanted to ask about that once they have not followed the instructions of the Supreme Court of Singapore or Supreme Court International Court in respect of paying back the legal costs as well as the money which is to be paid to Kiri for the 37.5% of stake. I think the date was 20th of January 2023. Am I right, sir?

Right, right. See, the -- actually, let me elaborate a little bit to you that the judgment for legal costs came on November 25, okay, which was last year. And there was a tri-party agreement, there was an understanding and undertaking from Senda that they would pay the legal cost within 21 days from the date of the final order from the Supreme Court. That was the commitment given. So that ended actually on December 20. Then 1 month extension was given, which entered on January 20. So your date is correct. January 20 is the date on which even extended time lines ended. And then Kiri had no choice but to file enforcement proceedings against them, which was done, I guess, on January 21 or 22. And then the steps were taken since then. So that is as far as the legal cost is concerned. For the valuation award, it is really unfortunate that Senda knew the cost, they knew their range, $481.6 million number was available to them. There was no stay on it which has been there since June 2021, almost 2 years passed since then, correct? And 3 months from the final award from the Supreme Court, which was March from SICC sorry, based from the direction of Supreme Court on March 3. And until today, also, it has not been honored, which is now compelling Kiri to believe that these guys are not going to pay. Their intention is not there. We go back to court and enforce the judgment. There is no other choice left when I speak with you today.

Mr. Gandhi, may we request that you to return to the question queue for follow-up questions. The next question is from the line of Jay Bathija from JV Investments.

Am I audible to you?

Yes, Jay. Please go ahead.

I have a couple of questions. My first question is on the business front, like we have been observing from past few quarters, the quarter is getting weak every quarter. So there is no sign of improvement on the business front, the industry as well as for the companies. Can you know the reasons for the same?

Well, if you look at the quarter 4 2023, the quarter which we announced, it is better than the earlier quarter, marginally better, not much better, but it's early better than the earlier quarter on standalone as well as on consolidated basis. But as I mentioned, the dyes and intermediates industry currently is going through a rough time, a tough time. Demand levels are low. If you look at the whole year's performance is almost half than the earler year as far as Kiri is concerned, correct? So that has impacted the margin significantly. And that has impacted the cost also significantly, correct? So that's the reason that the performance has not improved. But we are hopeful that the next quarter or the next few quarters, you see as the raw materials are going down, fuel cost to some extent has also come down. We see some signs of market to improve because the retail sales is becoming better globally, not only in India, and that will probably allow us to first to break even and more than break even, our target is to -- for this quarter, to at least try to achieve for breakeven or a plus and then improve thereon.

And sir, next question, what are the utilization of our plants currently in this current quarter and the current quarters which we are going?

The dye's capacity utilization was only 27%. Dye's intermediate capacity utilization was only 34% throughout the year, right, utilization...

Underutilization of our plant, any specific reason for it? China is dumping dyes or we are not getting orders, it is something like that?

Given that lower price, demand is less. And we try to hold on to certain price level. But overall demand, as I said, is around 50%. Dyes is almost 46% down, general as an industry and intermediate is also around 40% down from the normalized levels, from the demand, which were there in earlier years. So it's more driven by the market factors, by the industry factors. And please also note that we added certain capacities on certain intermediates and certain products in the last year. So when we added some capacities and those capacities are not filled up, again the utilization level on a whole -- on a totality is lower.

Mr. Bathija, may we request that you return to the question queue for follow-up questions. We'll take the next question from the line of [ Aditya Chirania ], Individual Investor.

My question is regarding the court case that you are currently fighting. I would like to know whether DyStar...

Mr. Chirania, the audio is not clear from your line.

Yes. So I was saying that I wanted to know whether DyStar -- does it have sufficient cash in hand to execute the [ buyout ] and if yes, is there any way Senda would extract this money from DyStar?

Very, very good question. And just to give you certain numbers, yes. DyStar has significant cash, DyStar has 0 bank loans, not even working capital. DyStar cash position is almost $370 million plus sitting on excess inventory, which is tied up cash in excess inventory, is around $150 million based on our analysis, so cash, cash equivalent and the encashable inventory put together is more than $500 million in DyStar, correct? And so that the -- as far as that funds can go to Senda and Senda can pay to Kiri, of course, that could be one of the options and Kiri has been open with this option, in fact Kiri has already proposed this option to Senda, that Kiri would cooperate, Kiri would pass the necessary resolution, Kiri would support such actions and initiatives and Kiri has recommended this kind of initiative to comply with the buyout order. So when we go to court, court is going to see this that Kiri has cooperated to the extent, even though Kiri is 40% -- 38% of that cash and the retail earnings belongs to Kiri, still Kiri has opened up these kind of options and avenues to help Senda to comply with the court order.

All right. So when you mentioned the value of $370 million plus the others of cash in the form of inventory or receivables coming to $500 million, is this $500 million U.S. dollar?

Yes, $500 million, correct. You also note that Longsheng, China, has a huge cash, right? And the cash in Longsheng, China, and cash equivalent is more than $900 million. So that's a big number.

Now my question here again is that Senda is in the Chinese jurisdiction. So now if DyStar passes the money to Senda which is in China, and Senda does not bring the money back, I mean, then that will be completely a part of the Chinese jurisdiction, actually it's a different volume altogether. Could you shed some light on this also?

Senda is a Hong Kong company, not a Chinese company, number one. Number two, Kiri's proposal, which was given, which encapsuled the way of transfer money directly to Kiri on behalf of Senda.

Okay. So I understand that there is no way that they can get those funds out of DyStar to Senda without Kiri's conformation?

No way. And that fund has to go to the escrow account.

Understood, sir. Understood. My second question is, you mentioned that you may have to liquidate the shares of DyStar in order to get this money. So in terms of liquidation of shares, would you be buying it as a first option or will it be sold in the market? And secondly, what is the valuation of DyStar?